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Contracts
University of Kansas School of Law
Ware, Stephen J.

CONTRACTS: Prof. Ware: Spring 2012
 
 
DEFINITIONS/OVERVIEW
 
What is a Contract?
 
A contract is formed in any transaction in which one or both parties make a legally enforceable promise.  A promise is a commitment or undertaking that a given event will or will not occur in the future and may be express or implied from conduct or language and conduct.  A promise is legally enforceable where it:
was made as part of a bargain for valid consideration;
reasonably induced the promisee to rely on the promise to his detriment; or
is deemed enforceable by a statute despite the lack of consideration.
 
Re. 1: A K is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law may in some way recognize as a duty.
·         UCC 1-201(11): see above
·         Element of the future is in inherent in a K.
 
Types of Contracts
Contract may be of the following types:
1)      Express – an agreement manifested by words
2)      Implied-in-fact – an agreement manifested by conduct
3)      Implied-in-law (“quasi-contract”) – not a true contract but an obligation imposed by a court despite the absence of a promise in order to avoid an injustice
Sources of Contract Law
1)      Common Law – in most jurisdictions, contract law is not codified, and thus the primary source of general contract law is caselaw.
2)      Restatement – written by the American Law Institute to provide guidance to the bench and bar, the Restatement of Contracts (currently in the second edition) has no legal force but nevertheless provides highly persuasive authority.
3)      Uniform Commercial Code (UCC) – created under the auspices of the American Law Institute and the National Conference of Commissioners on Uniform State Laws, has been adopted by every state except Louisiana.  Proposed revisions to Article 2, governing contracts for the sale of goods, have been finalized and presented to the states for enactment.
 
Contracts for the Sale of Goods
 
[1] Application of UCC
Article 2 of the Uniform Commercial Code covers all transactions for the sale of goods other than securities (article 9) and leases (article 2A).  It applies to any party; it is not limited to merchants although individual provisions may be.
 
            [2] “Goods” Defined
Under the UCC, a “good” is any tangible thing that is moveable.  [UCC § 2-105(1)]  In addition to manufactured products, “goods” include:
·         growing crops or timber, unborn young of animals and other identified things attached to land (other than minerals or the like or structures), regardless of who severs them from the land provided that they can be removed without causing material harm to the land
·         currency exchanged as a commodity (as opposed to the medium of payment for a good)
·         minerals or the like or a structure or its materials to be removed from realty that are to be severed by the seller
 
The term “goods” does not encompass:
·         intangible rights such as intellectual property
·         investment securities
·         money which is the medium of payment for goods
·         minerals or the like or a structure or its materials to be removed from realty that are to be severed by the buyer
 
            [3] “Sale” Defined
UCC § 2-106(1) defines “sale” as the transfer of title for a price.  Contracts that involve both goods and services must be evaluated to see which constitutes the primary purpose of the contract, with the secondary purpose being treated as incidental.  If the primary function of the contract is to provide a service, the UCC does not apply, even if an incidental sale of goods occurs.
 
            [4] “Merchant” Defined
A “merchant” is one “who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill particular to the practices or goods involved in the transaction” or who employs an agent or broker in such occupation.  [UCC § 2-104(1)]  
[5] “Good Faith” Defined
Every contract for the sale of goods imposes an obligation of good faith dealing on all parties in its performance and enforcement. [UCC § 1-203]  All parties, including non-merchants, are subject to UCC § 1-201(19) which defines “good faith” as “honesty in fact in the conduct or transaction concerned.”  Merchants are subject to an additional good faith standard, set forth in UCC § 2-103(1)(b), which requires “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”
 
CONTRACT FORMATION
 
I.                    Bargain: Rest. §17
A.     §17(1): Formation of a contract requires a bargain that has
                                                  i.      MOMA
AND
                                                ii.      Consideration
1.      *Note: reliance is NOT NEEDED to form a contract BUT it can sometimes take the place of consideration in certain circumstances.
B.     §17: “Exchange” = the future performance element of the K.
C.     “Bargain” = essential to the consideration requirement.
D.     Bill of sale = NOT a K, not a promise b/c it is memorializing a past exchange.
E.      K’s are about FUTURE promises to the extent that bilateral and some unilateral K’s are about the future (*Some unilateral K’s do make/deal with past/present.)
II.                 Consideration
A.     A promise must be supported by consideration in order to be enforceable.
B.     Rest. § 71: Requirements for Consideration
                                                  i.      Requirements of Exchange
1.      A performance or a return promise must be bargained for!!!
2.      Performance or return promise is bargained for if it is sought by promisor in exchange for his promise and is given by the promisee in exchange for that promise. 
3.      Performance may consist of:
a.       An act other than a promise, or
b.      a forbearance, or
c.       The creation, modification, or destruction of a legal relation
4.      Example- A desires to make binding promise to give $1k to his son B.  Being advised that a gratuitous promise is not binding, A offers to buy from B for $1,000 a book worth less than $1. B accepts the offer knowing that the purchase of the book is a mere pretense.  There is no consideration for A’s promise to pay $1,000.
5.      Abandoning or limiting a legal right such as smoking/driving, as an inducement for a promise, is sufficient consideration to create a legally binding K.  Hamer v. Sidway, p. 34; § 71(3)(b)
C.     Consideration requires a bargained-for exchange in which each party incurs a legal detriment/value.
                                                  i.      Bargained exchange
1.      Consideration is a bargained-for performance or return promise which is given by the promisee in exchange for the promisor's promise. 
2.      Any performance which is bargained for is consideration. Rest. § 72
3.      Consideration need not be furnished by or to the parties themselves as long as it is part of the bargained exchange.  
4.      Even if the promisor's promise induced performance or a return promise by the promisee, if such inducement was not sought by the promisor, there is no bargained exchange. 
a.       In such circumstances, the promise is merely an unenforceable gift.
                                                ii.      Legal Detriment/value
1.      A legal detriment exists where the party:
a.       engages in an act that the party was not previously obligated – whether statutorily or contractually – to perform; or
b.      refrains from exercising a legal right
c.       Under the pre-existing duty rule, a promise regarding a pre-existing obligation to the other party does not constitute a legal detriment. Rest. § 73
D.     Sufficiency of Consideration
                                                  i.      Adequate vs. Sufficient Consideration
1.      Adequacy of consideration relates to whether the bargain involves an exchange of equal value. 
2.      Generally, however, courts do not concern themselves with whether consideration is adequate, honoring the concept of freedom of contract. 
3.      On the other hand, courts do require consideration to be “sufficient”, which relates to whether there is a legal detriment incurred as part of a bargained exchange of promises or performances.
4.      If a bargain gives a party a choice of alternative obligations, each alternative on its own must constitute sufficient consideration for the return promise. 
5.      If a promise is void or voidable – e.g., due to the incapacity of the promisor – the sufficiency of the consideration is not necessarily negated. Rest. § 78, comment a
                                                ii.      Adequacy and Mutuality of Obligation: Rest. § 79
1.      If consideration is satisfied, no add’l requirement of gain/advantage or benefit to P’or or less/detriment to P’ee is required.
2.      No mutuality of obligation is required if there is consideration.
3.      Restatement Illustrations:
a.       Benefit to promisor or detriment to promisee, or
                                                                                                                          i.      A contracts to sell property to B.  As a favor to B (C’s friend) & in consideration of A’s performance of the K, C guarantees that B will pay agreed price.  A’s performance is consideration for C’s promise.  Illus. 1
b.      Equivalence in the values exchanged or
                                                                                                                          i.      A borrows $300 from B to enable A to begin litigation to recover a gold mine through litigation, and promises to repay $10,000 when he recovers the mine.  The loan is consideration for the promise.  Illus. 3
                                              iii.      Forbearance of Claims and Defenses Rest. § 74
1.      Surrender of a validly disputed claim – one for which there is a factual or legal uncertainty as to its merits – or the release of a validly asserted defense is sufficient consideration for a return promise. 
2.      Forbearance of an invalid claim or defense may also serve as consideration if the proponent of such claim or defense had a good faith belief in its validity and if there exists an objective uncertainty as to its validity. 
                                              iv.      Discharge of Obligation by Lesser or Greater Performance
1.      Generally, a promise to pay a lesser amount than is owed or to partially perform a pre-existing obligation does not constitute a legal detriment since the promisor is merely doing that which he is already obligated to do.
2.      However, if the promisor undertakes a greater obligation than is promised, such as paying or performing before the obligation is due, he incurs a legal detriment sufficient to form consideration for the discharge of the obligation.
                                                v.      Illusory Promises Rest. §77
1.      An illusory promise cannot serve as consideration. An illusory promise may exist where a promise is subject to a condition which is within the control of the promisor, especially where such condition is related to the contract performance, or when the promisor, at the time of the promise is made, knows that such condition cannot occur.
                                              vi.      Consideration as Motive or Inducing Cause Rest. §81
1.      What is bargained for does not need to induce the making of a promise to be consideration.
2.      A promise does not need to induce performance or return promise if the party forbearing intended in good faith to sue on a well-founded claim. Fiege pg. 40
                                            vii.      Implied Promises of Best Efforts and Good Faith Dealing
1.      Agreements for exclusive dealings may appear to be based on an illusory promise since the promisor's performance is subject   to conditions within its control. 
2.      Common law and the UCC have recognized an implied promise to use best efforts in an agreement for exclusive dealings, which furnishes the necessary consideration. 
a.       See Wood v. Lucy, Lady Duff-Gordon,) (involving an agreement by the defendant to give the plaintiff the exclusive right to market its name and designs); UCC § 2-306(2)
                                          viii.      False Recitals of Consideration
1.      Where there is a false recitation of consideration, the agreement will not be enforced for lack of sufficient consideration.  Consideration must in fact be rendered.
2.      OPTIONS Ks
a.       There is some conflict as to whether a sham recital of consideration in option contracts is sufficient to enforce the promise.
b.      Rest. §87 comment c, states “the option agreement is not invalidated by proof that the recited consideration was not in fact given.”
c.       However, most courts continue to deny enforcement where there is a false recital of consideration in option contracts.
d.      Rest. § 87(1): An offer is binding as an option K if it’s:
                                                                                 

      ii.      UCC 2-306 recognizes these b/c party is required to act in good faith.  Eastern Air Lines, Inc. v. Gulf Oil Corporation, p. 76
                                                                                                                      iii.      Illusory in the sense that buyer says they will buy everything they need from a supplier, or vice versa.  Hypothetically, a buyer could cease operations and not require anything. 
c.       Exclusive Dealing Contracts
                                                                                                                          i.      Seller is obligated to use best effort to supply the goods and the buyer to use best efforts to promote their sale in an exclusive dealing arrangement. UCC 2-306(2)
1.      This is technically a service covered by the UCC.  It does not involve the sale of goods, but a transaction in goods. 
                                                                                                                        ii.      Exclusive dealing arrangements impose an obligation by seller to use his best efforts to distribute & market goods.
                                                                                                                      iii.      Although the π never expressly promised to use reasonable efforts to promote D’s product, that promise may be fairly implied by the court. Thus there is consideration for the D’s promise to split the profits with π.   Wood v. Lucy, Lady Duff-Gordon, p. 83
G.     Reliance as Basis of Enforcement (still seen as a ‘bit of a reach’ argument and VERY RARELY supported by the court.)
                                                  i.      Using reliance for enforcement in the absence of a bargain leads to a shift from a promise argument to a reliance argument.
                                                ii.      Enforceable Promises Without Consideration: types of promises enforceable without consideration:
1.      Promises that induce a foreseeable and detrimental change of position by the promisee (promissory estoppel) Rest. §90
a.       Allegheny College: Charitable organization, setting aside funds for specific purpose, begin working to fulfill requirements to attain the gift, used other current funds for present expenses, relying on the future $$: court found this was reliance and awarded the gift under promissory estoppel.
b.      Feinberg: relied on CEO promise of a post-retirement pension for the rest of your life, retired upon that promise. Reliance = bargain/consideration.
2.      Gratuitous bailments where promisor promised to keep property (bailment) and took possession of the chattels w/o a return promise from promisee. Seigal
3.      a new express or implied promise to pay a debt that has become barred by the statute of limitations 
4.      a new express promise to perform all or part of a pre-existing obligation that has become discharged in bankruptcy
5.      where an original promise is voidable due to the promisor's incapacity, a new promise by such promisor upon attaining capacity
6.      where an original promise is voidable due to a valid defense by the promisor such as mistake, misrepresentation or undue influence, a subsequent promise by such promisor
7.      in contracts for the sale of goods, contract modifications UCC § 2-209(1), release of a claim by a signed writing UCC § 1-107, and a written promise by a merchant not to revoke an offer UCC § 2-205
8.      In some states, contract modifications in non-sale-of-goods transactions.
SPECIAL NOTE: §§ 2-204, 2-206 are the TRANSACTIONAL pieces of the UCC re: contract formation while §2-207 involves litigation re: K formation under the UCC. The point: 2-207 is NOT the be all, end all to K formation. Many disputes arise under 2-207, but most K’s  come under 2-204, 2-206
 
Paradigm pattern for 2-204: offer/order doc from buyer, a second acknowledgement/confirmation doc from Seller: the TWO documents TOGETHER create the K, each doc alone is NOT a K.
 
If the docs are NOT mirror images with respect to warranties, arbitration/dispute resolution/remedies, the article drafters solve this in §2-207.
H.     Restitution as Alterative Means of Enforcement (recovery)
                                                  i.      Recovery is based on preventing unjust enrichment.
1.      Implied K- (quasi) no meeting of minds; used when services are expensive or burdensome to person giving them.
2.      Implied in fact- parties intend but fail to make K, so court implies their intentions.
3.      Implied in law- one who is unjustly enriched at cost of another should make restitution.
                                                ii.      Implied in Law Contract
1.      Implied in fact contract is one where the court finds that the parties intended to make a contract but failed to articulate their promises and the court merely implies what it feels the parties really intended.
2.      Implied in law, there is never actually an agreement
a.       Fiction of the law, based on the maxim that one who is unjustly enriched at the expense of another is required to make restitution to the other.  It is as if we could have asked the parties at the time that if you could have contracted would you have?